Aug 4, 2011
Executives
Maryon Davis – Director, Finance and Investor Relations George R. Judd – President and Chief Executive Officer H.
Douglas Goforth – Senior Vice President, Chief Financial Officer and Treasurer
Analysts
Steven Chercover – D. A.
Davidson & Co.
Operator
Good morning. My name is Kimberly and I’ll be your conference operator today.
At this time, I would like to welcome everyone to the BlueLinx Second Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks there will be a question-and-answer period. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded, today, Thursday, August 04, 2011.
Thank you. I’d now like to introduce Maryon Davis with BlueLinx.
Ms. Davis, you may begin your conference.
Maryon Davis
Thank you, Kimberly, and welcome ladies and gentlemen to the BlueLinx second quarter 2011 conference call. With us this morning are George Judd, Chief Executive Officer and Doug Goforth, Chief Financial Officer.
Our press release was issued earlier this morning. A copy of the release is available in the Investor Relations section of the company’s website at bluelinxco.com.
Before starting the call, I need to refer you to our Safe Harbor statement. I would like to remind everyone that on today’s call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including all statements concerning future or unexpected events or results.
Actual results could differ materially from those projected in the company’s forward-looking statements due to known and unknown risks and uncertainties. A discussion of factors that may affect future results is provided in the company’s filings with the Securities and Exchange Commission.
BlueLinx undertakes no obligation to publicly update or revise any forward-looking statements contained in these presentations based on new information or otherwise, except as required by law. With that requirement completed, I’d like to remind our listeners that we have posted slides on our website.
We will be referring to these slides during this call and we encourage you to use them during our remarks. Additionally, the slide package contains an appendix of supplementary tables available for your review.
Now, let me turn the call over to our Chief Executive Officer, George Judd.
George R. Judd
Good morning, thank you for joining us today. Before beginning our remarks regarding the second quarter 2011 results, I’d like comment on our press release issued July 25, 2011 announcing the expiration of the subscription period for the previously announced $60 million rights offering.
The rights offering was fully subscribed and, as a result, on July 28, BlueLinx received net proceeds of approximately $58.5 million from the offering. The newly subscribed shares were issued on July 28, 2011, resulting in approximately 61.8 million total shares outstanding.
Joining this prepared remarks Douglas Goforth our Chief Financial Officer will provide a pro forma overview of the financial impact of the completed rights offering. We thank all of our shareholders for there support while we are still receiving information on our shareholder population post rights offering, service continues to hold approximately 54.5% the same percentage of shares help prior to the rights offering.
Now I’ll turn the call over to Doug to begin the review of the second quarter results.
H. Douglas Goforth
Thank you George and good morning everyone. I’ll start with an overview of the quarterly results and George will provide an operations review of the quarter and close with the final perspective.
For those of you following along with the slides posted on the Investor Relations section in the BlueLinx website, I will begin with slide 5. Overall, sales for the second quarter ended July 2, totaled $500.8 million, down 7.4% or approximately $40 million from the second quarter of 2010.
Specialty sales increased 10.7% year-over-year, reflecting a 16.5% increase in unit volume, partially offset by a 5.8% decline in product selling prices. Structural product sales decreased 27.1% from the same period last year.
This decrease was driven by an 18.9% decrease in volume and an 8.2% year-over-year decrease in product selling prices as prices for wood-based structural products price during the quarter. Specialty products comprised 62% of total sales up from 52% in the second quarter of 2010 as we continued to focus on higher margin products and services.
Overall, unit volume declined 0.5% compared to the year ago period. Housing continues to underperform, actual total US housing starts decline 4% for the second quarter of 2011, compared to the same period last year with single-family starts, which represents our largest share down 13.1%.
BlueLinx generated approximately $58 million in gross profit for the quarter. Overall, gross margin was 11.5%, which is down 0.4% from the prior year quarter.
Structural margins of 8.6% were down compare to the prior year quarter reflecting competitive pricing pressures. Specialty gross margin for the quarter was 14.4% compared with 15.5% a year ago.
Primarily result of the channel shift from the warehouse channel and lower prices which were temporarily inflated in the year ago period due to the Chilean earthquake. Total operating expenses decreased to $59.4 million from $60.5 million a year ago as we continue to tightly manage our cost structure relative to business conditions.
The decline in operating expenses primarily reflects decreases in variable compensation depreciation expenses and other items partially offset by a $1.1 million increase in fuel expenses. The company reported an operating loss for the second quarter of $1.8 million compared to an operating profit of $3.6 million in the prior year period reflecting a $6.5 million decrease in gross profit and a $1.1 million decrease in operating expenses.
EBITDA of $0.7 million decline $6.3 million over the prior year period driven by declining gross profit. Our second quarter net loss of $9.8 million or $0.31 per diluted share compares with the net loss of $3.4 million or a $0.11 per diluted share in the second quarter of 2010.
Our reported net loss for the period is after interest expense of $7.7 million, compared to interest expenses of $6.9 million in the prior year period which included $1.3 in pretax non-cash interest income associated with our interest rate swap. The current year net loss is after a tax provision of a $158,000 compared to an immaterial tax provision in the year ago quarter.
Looking at year-to-date results on slide six. Sales for the six month ended July 2nd totaled $891.4 million down 8.3% from the same period last year.
Gross margin of 11.7% decreased from 12% in the year ago period. Year-to-date reported operating expenses which included $7.2 million in real estate gains decreased 8.3% from the same period last year.
The resulting upgrading loss of $6.9 million was largely driven by the housing related dropping demand. EBITDA decline $4 million over the prior year period due to the decrease in gross profit partially offset by real estate gains and operating expenses.
The year-to-date reported net loss of $22.1 million or $0.71 per share compares with the net loss of $18.1 million or $0.50 a year ago. Turning to cash flow on slide 7, during the quarter, we used $38.3 million in cash from operating activities, primarily reflecting seasonal increases in accounts receivable of $35.8 million partially offset by inventory decreases of $7.7 million during the month of June as we right size levels to the current environment.
And net decreases in accounts payable and other current items. This compares with net cash used by operations of $34.3 million in the second quarter of 2010.
Cash used an investing activities was approximately $1.6 million primarily reflecting investments in our branches including our new facility in Nashville. Cash provided by financing activities was $39.8 million for the quarter, driven by a $48.4 million increase in outstanding borrowings under our revolving credit facility.
A $6.9 million decrease in bank overdrafts and a $1.6 million increase in restricted cash related to the mortgage. For the first half of 2011 we use approximately $101 million of cash for operating activities compared to approximately $81 million in cash during the year ago period, which benefited from a $20.2 million federal income tax refund.
Cash provided by financing activities during the first half of 2011 was $89.4 million driven by a $91.7 million increase in outstanding borrowings under our revolving debt facility at $7.8 million increase and restricted cash related to the mortgage and $5.8 million increase in back overdrafts. This compares to $70.8 million used in financing activities driven by a $68.7 million increase in borrowings and $9.9 million increase in bank overdrafts and $6.6 million increase in restricted cash related to the mortgage for the similar year ago period.
The resulting cash balance of July 2nd was $6.1 million compared with $18.8 million a year ago. Moving to slide 8, we had approximately $94 million of excess availability under our revolving credit facility as of quarter end.
The combined debt balance on our mortgage in revolving credit facility was approximately $474.6, an increase of approximately $49 million from first quarter 2011. Net debt at the end of the second quarter was approximately $430 million compared to $383 million at April 2nd and was up approximately $65 million from a year ago.
Subsequent to the end of the quarter the previously announce $60 million rights offering close. Slide nine, represents a pro forma second quarter balance sheet reflecting the rights offering.
On July 28, 2011 we issued approximately 28.6 million shares and receive $60 million in gross proceeds from the rights offering. $56 million of the proceeds from the rights offering were used to immediately pay down the revolving credit facility.
Also in conjunction with the rights offering we negotiated amendment to our revolving credit agreement which became effective on July 29th, 2011. On a pro forma basis assuming these transactions that occur at the end of the second quarter that combine debt balance on our mortgage and revolving credit facility with decline by approximately $94 million to $380.3 million.
Our net debt we filed $374.2 million and excess availability would be approbatory $155 million. Turning to slide 10.
Cash cycle days for the second quarter total 58 that compares with 55 days for the first quarter of 2010 and 49 days compared to the same period a year ago. The increase in cash cycle days was driven by both the build of inventory and anticipation of the stronger spring selling season and higher levels of specialty product.
We continue to balance inventory levels with the weakening demand environment but also continuing to support strategic products and vendors as part of our ongoing focus on specialty product growth. That concludes my prepared remarks.
Now, let me turn the call over to George.
George R. Judd
Thank you, Doug. Before our comments further on the quarter I’d like to talk about the recently released housing data.
According to the U.S. Commerce Department in housing starts increased 14.6% sequentially to a seasonally adjusted in a rate of 629,000 units.
The highest levels since January as ground breaking from multi-family units increased 31.6%. Many economy is believe that the shape of the housing recovery starting to form when that will be one in which multi-family market recovers before the single-family home market recovers.
I also believe that the multi-family segment believe the recovery market-by-market. BlueLinx is more closely tie the single-family housing market.
We also participate in the wood frame multi-family segment. High rise multi-family is left significant force.
We report also showed our gains in the construction to single-family homes. Regardless of which market recovery first any pick up the housing this could BlueLinx and it certainly are enhancing to participate in this recovery.
BlueLinx is operational performance during the second quarter a well impacted by the continued difficult conditions with the housing and construction markets benefited by our ability to execute on our specialty product strategy. In our specialty business we saw unit volume growth led by product lines while we have strategic growth initiatives.
Overall a unit volume grew 16.5% as we executed these growth strategies we have said in previous calls this recoveries unfolding market-by-market and we intend to expand our share and recovering markets by targeting specific customers and products in specific markets. Specific sales as a percentage of total revenue are 62% in the second quarter, surpassing our long-term goal of 60%.
Specialty revenue grew 10.7% expanding across all the distribution channels in both reload and direct channel business showing strong year-over-year growth. Gross profit increased $1.2 million or 2.8% on margins of 14.4%.
We will continue to focus on increasing our specialty products revenue growing well above 60% target. Our structural business had a more difficult quarter.
Structural unit volume declined 18.9% as we focus on maintaining margin in a falling price environment, we saw the average prices of key periods of lumber, plywood and OSB decline approximately 12% from the end of the first quarter and 20% from the year ago quarter. While committed to service in our customer structural product needs, we focus on inventory turns and fill rates as structure wood product prices decline.
We had product available to sell managed our margins versus unit volume growth and achieve a legal margin of 8.6% while providing our customers with a products they needed. Prolonged market declines are difficult environments in which we achieve acceptable margins.
We continue to make appropriate investments in people and processes to help ensure our success as we move forward in 2011 and beyond. Recently, I made the decision to realign all of the sales operations for the east and west to report to Joe Kastelic, our new Senior Vice President in the sales.
Joe joined BlueLinx in May of last year as Senior Vice President of our Denver sales center. In his role here at Atlanta, he will oversee sales operations for the entire company.
He will continue to refine and adjust our management team to support our market strategies and provide best in energy service to our customers and vendors. We are also making investments in processes and systems that will make it even easier for our customers to do business at BlueLinx.
During the quarter, we rolled out several pilot markets, in our new E-Commerce platform branded My Bluelinx Online. This new E-Commerce initiative provides our customers with 24/7 access to their transactional data and shipment notifications to an online easy to use and navigate website.
Customers are adapting well to the side and have sided to provide this enhanced, we are excited to provide this enhanced capability to our customers. Future phases will include e-catalog and online purchasing to further enhance our customer service level.
In summary, we believe the second quarter performance demonstrates that BlueLinx is operating effectively in a tough environment. We continue to strengthen our long-term value proposition with customers and vendors by maintaining appropriate margins and declining to participate and less than profitable businesses.
We are making key investments in the inventory, sales and systems and we are focusing resources on our specialty product growth initiatives. Our long-term objective continues to be to grow specialty products to more than 60% of our total sales and we exceeded this goal during this quarter.
We’ll continue to execute against this goal, working hard to achieve sustainable and profitable specialty growth. We’ll continue to manage our structural business for profitability and focus on value-added products within our structural family of products.
With that, I will open the call to questions. Operator, would you please instruct everyone on how to ask questions?
Operator
(Operator Instructions) Your first question comes from the line of [Alan Weber] (Inaudible).
Unidentified Analyst
Good morning. Hello.
George R. Judd
Hi, Alan.
Unidentified Analyst
Just a few questions, one is when you talked about the structural and specialty products, have you may had such a change in volume, and it’s just unclear why such a percent of change. I mean in structural has something changed there, were you (inaudible) in those market share or just can you explain that?
George R. Judd
Yeah. On the structural business, Alan during the quarter and the last year, we had substantial increases in price and which drove demand.
So we had, last year we had the housing tax credit, which inflated demand for some building products earlier in the year. We didn’t have that this year and then, we had inflating price environment, which always drives an emotional demand increase.
So we didn’t see that this years. The second thing is that we had a prolongs, 12 weeks of continuous price decline and when the price has fallen 12 weeks in a row, we have to really tightly manage our inventories and manage our margin expectations.
We don’t want to grow our volume and a declining price environment, many times, the products did we are procuring have three or four weeks lead time to our facilities. So if we buy it today, it comes in four weeks and it’s four weeks worth of market decline less than when we bought it one in negative margin position.
So it’s important for BlueLinx to manage our inflows and our outflow of commodity structural products in those declining periods and we did that. So we did pass on some business.
We probably did lose some share during the quarter, but it would have been less than acceptable margins where BlueLinx make a profit.
Unidentified Analyst
Okay. And then can you talk about, as you talk about that, can you talk about as you see it changes kind of on the competitive environment, just given whether you’ve seen on a local basis, other distributors out of business or where that’s been?
George R. Judd
So we’re presented our margin and that’s also why earlier last year, we talked about special targeted programs, special customers and specialty products that we’re focused on and it’s not everything and it’s the areas where we think there’s opportunities for BlueLinx to gain share at acceptable margins and that’s what we’ve dedicate in our resources and is what we’ve shown in our results.
Unidentified Analyst
Okay. My last question is, can you talk about and I really don’t want to get projections, but kind of what you expect the cash flow relative to last year, if your cash flow is flat with last year’s second half.
You really consume quite a bit of cash this year which kind of almost to offset on top of right sourcing, just curious how do you see the cash flow for the balance of the year relative to last year?
H. Douglas Goforth
This is Doug. If you look at our first half cashes, it’s in line with what we use last year if you take out the tax refund that we received last year.
In the second half of the year, we always generate cash as you bring down working capital et cetera. So our expectations right now is our cash usage for 2011 will be slightly higher than 2010.
We always have a proviso on that, because as the business environment starts to pickup, we could make some strategic purchases in inventory et cetera to take into the beginning of 2012.
Unidentified Analyst
Okay, great. Thank you very much.
Operator
Your next question comes from the line of Steve Chercover of D. A.
Davidson.
Steven Chercover – D. A. Davidson & Co.
Good morning everyone. You actually answered some of my questions, but just Doug, on your last comment, you could make some strategic inventory acquisitions, I mean that doesn’t entail speculating.
Does it?
H. Douglas Goforth
No.
Steven Chercover – D. A. Davidson & Co.
You would just lay in, if the fighters were very, very…
H. Douglas Goforth
It’s solely different opportunities at the end of year, Steve. There could be one if there’s always somebody out there who want to buy promotions and if we believe that the prices right on those, and the bills that go along with that make sense of BlueLinx then we could participate in that.
We always participate in some form or another winter buys, but you can put $1 million into winter buy program so you could put $10 million in the several winter buy programs.
Steven Chercover – D. A. Davidson & Co.
Perfect.
George R. Judd
[Partially] commodity side, Steve. This is the specialty of the business, the values we provide for many of our manufacturing partners is helping them level low to production.
So if they’re producing product later this year for the spring season and they make it, so that it’s – make the deal so to speak, so that’s favorable for BlueLinx to purchase that product in December versus February when we might eat into March, we do participate in these programs.
Steven Chercover – D. A. Davidson & Co.
Got it, thanks. Now, how are business trends in July versus the second quarter?
George R. Judd
Well, I mean business is still struggling out there, it’s slow. Our trends are consistent with the latter half of the second quarter and the latter half of the second quarter was better than the first half, but it’s still tough out there.
Steven Chercover – D. A. Davidson & Co.
Yeah. I can see.
Now that you hit your target of 60% on specialties. I mean I think are you going to reassess targets at all or you just want to grow the overall play?
George R. Judd
No. we’re going to reassess the target, we’ll move that target up, we’ll move the target up and announce what that target is after we have a couple of quarters where we beat it, because we did have a struggling structural quarter, which we talked about and that was due to pricing and strategy on our part.
So that squeeze the number somewhat, but we like to have a 16% growth, 16.5% growth in specialty if we see that sustained, which I’m counting on our team to produce those results, then we’ll up to target.
Steven Chercover – D. A. Davidson & Co.
Very good, over the last several years, your relationships with Georgia-Pacific has kind of changed. So overall, on the structural side, have you got a lot of new suppliers, I mean is the landscape very different?
George R. Judd
Yeah. We do business with all of the major force product producers including some that the market views as competitors, but Georgia-Pacific is still a very large supplier to BlueLinx and where we add value, we do a lot of business.
Steven Chercover – D. A. Davidson & Co.
Okay. Just a couple more if I could.
Your unit volume is only down 0.5% in the quarter and we compare that to the decline in housing, it seems like you actually outperformed. So, but I think you said, you might have lost some shares.
So can you reconcile that?
George R. Judd
Just on the structural side, right. So on the structural side of the business, we didn’t changed a lot of business, so there was – there’s always that noisy right on inventory what the inventory levels in the channel are.
I don’t think that BlueLinx maintained or gained our share on the structural side of the business during the quarter simply because of the business we patched on, could have taken a lot more business, that business was out there and we didn’t take it and I view that as share relation, somebody took it.
Steven Chercover – D. A. Davidson & Co.
Got it. Okay, final one and this is kind of a broad question, obviously you’ve been working hard to address the balance sheet and you paid down $56 million of the debt and you have more liquidity than currently when you ended the quarter.
So how would you characterize your relationship with your lenders? I mean are they still very supportive?
George R. Judd
Oh, extremely supportive, particularly on the ABO side, the bank group was very positive of our efforts, we’ve been working on this whole rights offering process, including ABO and mortgage amendment since January and we pretty much had everything agreed to with the ABO lenders in May and signed off on that, and are just waiting for the right offering to close. But the changes that we got on the ABO particularly some tweaks to the advanced rates et cetera as I look out there, companies who are in this space have publicly provided information, our advanced particularly in accounts receivable and inventory or up there at the top.
So we do an extremely good job of managing our accounts receivable and inventory. And they see that and worked with us because of that.
Steven Chercover – D. A. Davidson & Co.
Great. Now it seems like you guys are doing everything right in a really tough environment.
Thanks for taking my questions.
George R. Judd
Thanks Steve.
H. Douglas Goforth
Thanks. I appreciate it.
Operator
I would now like to turn the conference back over to Mr. George for closing remarks.
George R. Judd
Okay, thank you, Operator. In closing, I would again like to thank our shareholders for their continued support and to thank our employees, they’ve been working very, very hard and safely and very effectively in the difficult market, I appreciate that everyday.
And thank you buddy for attending our call. We look forward to talking to you next quarter.
Operator
Ladies and gentlemen it does concludes today’s conference. You may now disconnect.